Since 2018, global growth has been hampered by the ongoing trade war between the US and China. But while this high-profile clash continues to make headlines around the world, it is just one of many disputes causing long-held trade agreements to crumble: for instance, diplomatic tensions have re-emerged between Japan and South Korea, and at the time of World Finance going to print, the UK’s future relationship with the EU remains uncertain.
These compounding forces have led the IMF to slash its growth forecasts for 2019 and 2020, with the organisation stating in July that trade disputes continue to “sap confidence, weaken investment, dislocate global supply chains and severely slow global growth below the baseline [rate]”. According to Vishnu Varathan, Head of Economics and Strategy at Mizuho Bank, these impacts have already begun “reverberating through more channels than was initially anticipated”. One major casualty is the small city-state of Singapore.
Since Singapore declared independence from Malaysia in 1965, the nation’s economy has boomed. In that time, the city-state has claimed one of the highest rates of GDP growth around the world, registering an average increase of 7.7 percent per annum (see Fig 1), according to the World Bank. In the first two and a half decades of independence, the economy grew even faster, recording an average rise of 9.2 percent per year.
Perhaps most notably, Singapore has flourished as a financial hub, boasting one of the world’s best regulatory environments for business. In 2019, the country was recognised by the Switzerland-based International Institute for Management Development as the most competitive economy in the world, due to its favourable immigration laws, strong technological infrastructure and highly skilled workforce.
But with one of the busiest ports in the world, the South-East Asian nation’s economy relies heavily on exports. “Where trade is a means to get goods from A to B for most countries, it is a direct source of income for Singapore,” Robert Carnell, Chief Economist and Head of Research for Asia-Pacific at ING, told World Finance. In fact, according to World Bank data, trade represented 326.2 percent of GDP in Singapore in 2018. “[A] global trade slowdown… is a considerable hit to Singapore’s trade hub role in South-East Asia,” Carnell added.
Unfortunately for Singapore, the simmering trade dispute between the US and China is unlikely to end any time soon, with US President Donald Trump blacklisting (albeit with temporary exemptions) Chinese telecoms firm Huawei and announcing fresh tariffs on $300bn worth of Chinese products in August. And even if Trump were to be ousted in the 2020 US presidential election, Carnell believes a change of leader would not be unambiguously positive for global trade: “What happens next is an open question. Tariffs may be here to stay.”
This prognosis is bad news for Singapore, which recorded its slowest annual rate of growth for a decade in Q2 2019: according to Singapore’s Ministry of Trade and Industry, GDP grew by just 0.1 percent year on year, significantly slower than the 1.1 percent growth that had been registered in Q1. On a quarterly basis, GDP shrank by 3.4 percent. Singapore’s non-oil exports, meanwhile, dropped by their greatest margin for more than six years in June, marking a fourth month of consecutive decline. According to Enterprise Singapore, exports of non-oil products fell by 17.4 and 11.2 percent in June and July respectively when compared with the previous year.
In the short term, Carnell expects economic growth to remain “very sluggish” at a rate that is “well below two percent, and nearer to one percent – if that”. In fact, Singapore cut its 2019 GDP forecast to between zero and one percent, down from 1.5 to 2.5 percent. The IMF, which also trimmed its expectations in July, was slightly more optimistic with a prediction of two percent growth, down from its earlier forecast of 2.3 percent.
With the economy teetering on the edge of recession, Varathan told World Finance that the situation cannot be ignored any longer: “If the trade conflict takes a turn for the worse, then 2020 recession risks start rising.”
The chips are down
Trade troubles have heaped pressure on Singapore at a time when one of its pillars of economic strength, the semiconductor industry, is already faltering. Electronics manufacturing is an important source of economic growth in Singapore: according to the government’s Economic Development Board (EDB), the industry generated $64.8bn in 2015, accounting for more than 31 percent of its total manufacturing output. The industry also employed more than 68,000 workers that year, or 17 percent of Singapore’s total workforce.
Unfortunately for Singapore, the simmering trade dispute between the US and China is unlikely to end any time soon
Singapore is responsible for manufacturing a significant portion of the world’s memory chips, microprocessors and other electronic components, with the EDB calculating that the country’s semiconductor equipment output accounts for approximately 20 percent of the global total. These parts are then shipped out to be used in mobile phones, computers, televisions and cars, as well as many other everyday products.
The sector has enjoyed explosive growth in the past, but the non-profit organisation World Semiconductor Trade Statistics (WSTS) predicted the global semiconductor market would shrink by 12.1 percent in 2019. This decline follows year-on-year growth of 21.6 percent and 13.7 percent in 2017 and 2018 respectively. While the WSTS expects the sector to grow by 5.4 percent in 2020, slowing demand and trade tensions have already led chipmakers in Singapore to reduce production and begin cutting hundreds of jobs, according to an investigation by Reuters.
For instance, John Nelson, President and CEO of UTAC Group, a Singapore-based company that assembles and tests semiconductors, told Reuters the firm’s consolidation process could result in a 10 to 20 percent drop in its local headcount. According to Reuters, local media even reported that AMS, a chipmaker that supplies Apple, had cut as many as 600 jobs in Singapore. Carnell warned that this downturn could worsen as the slump spreads to other industries: “The bulk of the pain right now is in tech, but it is not totally isolated.”
Varathan also expects job cuts to seep beyond the semiconductor industry: “In today’s context, the tech sector job cuts could expand.” He told World Finance that the “cascading effect” of the convergence of numerous trade conflicts around the world could lead to a supply chain backup, causing job losses to start spiralling. With the decline forcing companies to hold back on spending and hiring, Singapore’s continued drive for digitalisation and streamlining will only exacerbate the downturn. “A widening job shock could very well be something that stares us in the face, rather than being a distant risk,” Varathan said.
Others are more optimistic about the immediate future of chipmakers. In an interview with Reuters, Lim Kok Kiang, Assistant Managing Director of the EDB, said the nation remains competitive in the electronics manufacturing sector and has even attracted new investment. Meanwhile, Ang Wee Seng, Executive Director at the Singapore Semiconductor Industry Association, told World Finance that the current bout of slow growth is different from previous downturns in the market, in that demand effectively still exists. The growth of 5G, the Internet of Things and automobile technology will continue to fundamentally drive demand even as trade tensions and supply chain issues mask it.
“The slow growth is happening because of the lack of confidence by the consumer and because of the trade war and trade tensions – that’s why we’re seeing a slowdown,” Ang said. As such, he believes widespread retrenchment and shutdowns are unlikely “because, technically speaking, there is still business”.
On top of the worsening environment for international trade and the downturn in the semiconductor industry, Singapore faces structural hurdles to growth, including a rapidly approaching demographic time bomb. In recent decades, the city-state has experienced both a sharp decline in fertility and large gains in longevity. According to the Singapore Department of Statistics, the country has one of the world’s highest life expectancies at 83.2 years, while its fertility rate stands at just 1.14.
In its 2017 World Population Ageing report, the UN said Singapore’s population would continue to skew older: “The Republic of Korea and Singapore… are projected to see the largest change in the proportion of persons aged 60 years or over between 2015 and 2030, with increases of about 13 percentage points.” UN data also shows that the median age of Singapore’s population is expected to climb to 46.8 years by 2030, up from 39.7 in 2015 (see Fig 2). By 2050, the number of citizens aged 60 or over is forecast to grow by 137 percent, the report said.
With an older population equating to a shrinking labour pool, Singapore will be charged with maintaining economic growth as its workforce dwindles. To address this, the government has embarked on a programme that prioritises innovation and the upskilling of workers. “Singapore is trying to re-engineer itself as a tech and innovation centre,” Carnell said. “Considerable resources are being aimed at this – from education to infrastructure. [But] in my view, it is very hard to legislate for innovation.”
Ang told World Finance that Singapore’s workforce training programmes are more important than ever: “If anything, [the economic slowdown creates a] bigger objective for companies to upskill their workforce.” Varathan, meanwhile, said retraining programmes are likely to help ease some of the pain of Singapore’s headwinds, but believes they will not be enough on their own: “We have to be very clear – reskilling, upskilling and all of this will help to smooth out the transition, but it wouldn’t completely eliminate the job losses that come about. It is a case of some kind of pain relief.” With the “colliding forces” of greater digitalisation and trade conflicts creating uncertainty around hiring, Varathan said: “It’ll be very difficult to fully address and mitigate against the confluence of challenges.”
Fortunately, Carnell thinks Singapore is “far from helpless” when it comes to taking steps to provide a fiscal stimulus to the economy, as it has one of the world’s largest war chests of reserves to draw upon. He did, however, concede that “strong construction activity in recent years makes the possibility of speeding up infrastructure spending… very difficult”. It is more likely that relief will come in the form of tax breaks for companies providing employment and investment, or for individual incomes as a way of stimulating spending.
In fact, when polled by Reuters in July, seven of 11 economists believed Singapore’s central bank, the Monetary Authority of Singapore (MAS), would ease monetary policy at its biannual meeting in October – an event that had yet to take place at the time of World Finance going to print. MAS, which manages Singapore’s monetary policy by adjusting the exchange rate of the Singapore dollar rather than changing interest rates, tightened monetary policy twice in 2018 by raising the slope of its currency band, causing the Singapore dollar to appreciate. Carnell expects MAS to move to a neutral currency path from its current moderate appreciation. Such a decision, however, could be influenced by any developments to ongoing trade disputes.
The long game
Singapore often acts as a bellwether for the global economy, meaning any bad news for the country is likely to be just a small sign of what’s to come elsewhere. Some, however, view Singapore’s current economic woes as nothing more than a temporary setback, with foreign direct investment (FDI) continuing to flow into the nation.
According to the UN Conference on Trade and Development’s (UNCTAD’s) World Investment Report 2019, FDI inflows reached $78bn in 2018, up three percent from 2017. The city-state was the fourth-largest recipient of FDI last year – behind only the US, China and Hong Kong (see Fig 3) – largely as a result of robust investment in services and a rise in cross-border mergers and acquisitions.
In July, Lin Nguyen, an analyst in South-East Asian regional security who primarily focuses on economic and political activity, wrote in support of the country’s ability to bounce back in the South China Morning Post: “Official opinions that the country is not on the verge of recession are reassuring and underscore its economic fundamentals, making Singapore well-suited to weather any approaching storm.” In fact, even those who believe Singapore faces a bumpy road in the next few years expect the country’s long-term prospects to remain bright. “If Singapore were an equity, not a country, you wouldn’t call it a growth stock right now, but you would consider buying it from a value perspective,” Carnell said.
Slower growth and lower productivity are simply symptoms of Singapore’s transformation into a developed economy. “To some extent, Singapore simply has to get used to it,” Carnell said. “It is now more of a two percent [GDP growth] economy than a three to four percent GDP [growth] economy. That [comes] with development.”
Varathan echoed this sentiment, explaining that Singapore’s neutral growth rate could remain at around three percent moving forward – much lower than the previous average increase of 7.7 percent cited by the World Bank. “Insofar that we don’t compare [it] to the pre-global-financial-crisis days, I think growth will start picking up again in Singapore,” he said. With the property market gaining ground and fintech offering a vibrant space for further innovation and development, Singapore’s prospects do not look so gloomy after all. What’s more, the broader digitalisation drive that the government is leading “would automatically see some spending [and] some jobs [introduced]”, Varathan explained.
Although demographic challenges will remain a constant constraint for Singapore, the technological advances expected to sweep through the global economy in the coming years will provide a sure-fire boost thanks to the country’s grip on the global tech sector. “One day, when 5G becomes more of a reality, Singapore’s tech-ready, innovation-focused economy really will fly,” Carnell said. While these gains may still be a few years off, he added: “There is a period ahead of several years of extremely buoyant growth.”
Today’s economic environment poses a number of challenges to Singapore’s export-reliant economy, but while growth may continue to be hindered by trade wars in the short term, the nation’s long-term approach points to a brighter future. “[Singapore’s] future earnings are not reflected in the current market price [of GDP or the Singapore dollar],” Carnell said. “But as long as you have the patience of Warren Buffett, owning [a stake in] it for the long term could be extremely profitable.”